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2018 Financial Gift-Giving Guide

Americans spend an average of $1,000 during the gift-giving season, according to the National Retail Federation. While there’s nothing wrong with the proverbial tie or toy, there are also financial gifts that can literally keep on giving in the form of stocks, bonds, books, cash, college savings accounts and even real estate. Here are options for everyone on your list—from small gestures to more-substantial offerings.

Savings accounts

A simple savings account is a gateway to teaching kids critical financial lessons—from wealth accumulation to the power of compound interest. Helping them compare statements from month to month can be its own lesson in financial literacy.

If you want to give a gift of cash that’s also a collector’s item, you might consider annual and special-edition coins from the United States Mint, the Royal Canadian Mint, the United Kingdom’s Royal Mint and others. Cash in this form may or may not appreciate over time, but its tactile, treasure-chest appeal can’t be beat.

529 college savings plans provide federal tax-free growth and tax-free withdrawals for qualified expenses (including K-12 tuition in some states). Some states even offer tax credits or deductions for contributions to their 529 plans.

Coverdell Education Savings Accounts provide federal tax-free growth and tax-free withdrawals for qualified expenses (including not just tuition but also school supplies, uniforms, and even room and board). To contribute to such an account, your modified adjusted gross income must be less than $110,000 ($220,000 for married couples) and total account contributions must not exceed $2,000 per beneficiary in 2018.1 Contributions to Coverdells are not tax-deductible.

A classic gift for children, savings bonds are a great way to teach discipline and patience in investing. There are two main options:

EE bonds earn a fixed rate of interest for up to 30 years, making them attractive during periods of low inflation or even deflation.

I bonds earn a fixed rate of interest—plus an additional inflation-adjusted rate that is revisited semiannually, which can help protect young investors if inflation increases.

Gains from all savings bonds are exempt from state and local income taxes—and may be free from federal taxes when the bonds are used for qualified higher-education expenses. Savings bonds are no longer sold at financial institutions but can be purchased online at treasurydirect.gov. Paper I bonds can be bought only with a refund from a federal tax return. The minimum purchase is $25 for electronic EE and I bonds and $50 for paper I bonds.

Bonds and stocks

Individual fixed income and equity investments are an opportunity to educate the next generation of investors. Of course, there’s no telling whether the bond or stock you give will rise or fall in value, but what such gifts can offer is a first-hand lesson in the market’s inner workings.

Alternatively, shares in an exchange-traded fund (ETF) or mutual fund provide access to a broad basket of securities that can begin to teach the considerable benefits of diversification.

In order to gift investment assets to a minor, you must first establish a custodial brokerage account on her or his behalf. There are two types of custodial accounts: a UGMA (Uniform Gifts to Minors Act) or UTMA (Uniform Transfers to Minors Act).

The two account types are largely the same, though contributions to UGMA accounts are limited to cash, insurance policies and securities (such as stocks, bonds or mutual funds), whereas you can contribute virtually any kind of asset to a UTMA account, including real estate.

The availability of the two account types varies by state, as does the age at which the beneficiary may take control (typically 18 or 21). Contributions to both account types are considered “irrevocable”—meaning they belong to the beneficiary and cannot be reclaimed.

Family and friends can indirectly contribute to the Individual Retirement Account (IRA) of another person, though the recipient must have earned income equal to or greater than the contribution and must make the deposit her- or himself. In 2018, the contribution limit is $5,500 (plus another $1,000 for those age 50 or over).

That said, parents can establish and fund a custodial IRA for a child, assuming he or she has earned income equal to or greater than the contribution. Of the two main IRAs—traditional and Roth—the latter might make more sense for children, who are unlikely to meet the ROTH IRA income limitations and whose long investment horizons make the tax-free withdrawals in retirement2 all the more beneficial (see “Leave It to Beaver”).

Robert Aruldoss, a senior financial planning analyst at the Schwab Center for Financial Research, recommends five books for all ages.

A Chair for My Mother, by Vera B. Williams: This Caldecott Honor picture book tells the story of a young girl, her mother and grandmother pooling their coins for a chair the whole family can enjoy.

The Richest Man in Babylon, by George S. Clason: This 1926 classic provides insight into seven basic principles on saving and investing through the lens of ancient and abiding parables.

How to Think About Money, by Jonathan Clements: This former Wall Street Journal personal-finance columnist provides a road map for success with his cohesive approach to financial decisions big and small.

The Savage Truth on Money, by Terry Savage: Another former financial journalist lays out the basics for acquiring and managing money—including purchasing insurance, putting kids through college, and setting yourself up for a successful retirement and beyond.

The Charles Schwab Guide to Finances After Fifty, by Carrie Schwab-Pomerantz and Joanne Cuthbertson: Don’t take our word for it. “Ms. Schwab-Pomerantz supplies comprehensive advice on almost everything from what to do with a 401(k) when you leave a job to how to maximize Social Security and Medicare benefits once you retire. The book is well worth your time, whether you are over 50 or just see the big 5-0 looming,” wrote The New York Times in its 2014 review.

For the person who has everything

Charitable donations in another person’s name can pay dividends in more ways than one.

You can contribute cash (or even an old car) to a qualified charity in someone else’s name and still capture the tax deduction, assuming you itemize. “Gift givers appreciate the fact that they can donate to a worthy cause and potentially reduce their tax liability in the bargain,” says Kim Laughton, president of Schwab Charitable.

You can similarly donate appreciated bonds, stocks or shares of an ETF or index mutual fund. Not only will you avoid taxes on any gains but you can deduct the full market value of the gift.*

Clients who want to instill the charitable spirit in their children may want to consider donating to a charity of their kids’ choosing in lieu of one or more holiday presents. “Establishing a charitable tradition, especially around the holidays, is a great way to remind our children what the season is really about,” Kim says.

*Charitable deductions are generally limited to between 20% and 50% of your adjusted gross income depending on the type of asset and the type of organization to which it is contributed.

1The maximum contribution to a Coverdell Education Savings Account begins to phase out at a modified adjusted gross income of $95,000 ($190,000 for married couples filing jointly) and phases out entirely at a modified adjusted gross income of $110,000 ($220,000 for married couples filing jointly).

2Account holder must be at least age 591/2 and have owned the account for at least five years.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

This information does not constitute and is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner, or investment manager.

A donor’s ability to claim itemized deductions is subject to a variety of limitations depending on the donor’s specific tax situation. Consult your tax advisor for more information.

Contributions of securities held for longer than one year are generally deductible at fair market value (FMV); securities held for one year or less have the same AGI limits as cash contributions (60%), but the valuation is based on the lesser of the cost basis or FMV. Contributions that exceed AGI limitations may be carried forward and deducted for five years. An account holder’s ability to claim itemized deductions may be subject to further limitations depending upon the donor’s specific tax situation and account holders should consult their tax advisors.

Schwab Charitable is the name used for the combined programs and services of Schwab Charitable Fund, an independent nonprofit organization. Schwab Charitable Fund has entered into service agreements with certain affiliates of The Charles Schwab Corporation.

Diversification strategies do not ensure a profit and do not protect against losses in declining markets.

Investing involves risks, including loss of principal.

(1118-8K3N)

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